Oil Physical and Financial Markets: Economics, Engineering, Pricing, And Regulations

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Oil Physical and Financial Markets: Economics, Engineering, Pricing, And Regulations

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  • Source: Prices from BP Statistical Review
  • Sources:
    $70 per barrel: Ferdinand Banks, Economic Theory and Oil: A Modern Survey, (2008) 16.
    Offshore percentage: Ferdinand Banks, The Political Economy of World Energy: An Introductory Textbook, (Singapore: World Scientific Publishing Co., 2007), 36.
    Crude Quality: U.S. Department of Energy, Energy Information Administration, “Crude Oil Input Qualities,”
    http://tonto.eia.doe.gov/dnav/pet/pet_pnp_crq_dcu_nus_m.htm (accessed April 10, 2009).
    (4) 2030 Demand: International Energy Agency “IEA Forecasts Energy Demand to Increase 1.6 percent a Year Through 2030,” International Agency on the Web, November 13, 2008. http://www.prlog.org/
    10141086-iea-forecasts-energy-demand-to-increase-16-percent-year-through-2030.html (accessed
    November 14, 2008) Quoted in PRLog Free Press Release on the web

  • Sources:
    “Estimation and Classification of Reserves of Crude Oil, Natural Gas, and Condensate.” Society of Petroleum Engineers. Chapman Cronquist.

    The process of moving a reserve classified as possible to probable simply involves drilling and sampling the oil in order to verify the estimates made from a seismic test. Companies do not make the first drill, known as a “Wild Cat,” until there is an economic incentive to do so. When companies report known oil reserves, they only include “proven reserves,” which means that the “recoverable oil” (reserves) may be larger than reported.
  • Sources:
    “Estimation and Classification of Reserves of Crude Oil, Natural Gas, and Condensate.” Society of Petroleum Engineers. Chapman Cronquist.
    For Graph. Kevin’s Petroleum Engineering class notes
  • Sources:
    “Estimation and Classification of Reserves of Crude Oil, Natural Gas, and Condensate.” Society of Petroleum Engineers. Chapman Cronquist.

    The process of moving a reserve classified as possible to probable simply involves drilling and sampling the oil in order to verify the estimates made from a seismic test. Companies do not make the first drill, known as a “Wild Cat,” until there is an economic incentive to do so. When companies report known oil reserves, they only include “proven reserves,” which means that the “recoverable oil” (reserves) may be larger than reported.
  • Sources:
    “Estimation and Classification of Reserves of Crude Oil, Natural Gas, and Condensate.” Society of Petroleum Engineers. Chapman Cronquist.
    Wikipedia:
  • Sources:
    Wikpedia: http://en.wikipedia.org/wiki/API_gravity
    American Petroleum Institute)
  • Sources:
    (1) “Environmental Challenges Panel Refiner Overview API Tanker Conference” Ken Applegate. Published at the American Petroleum Institute

    Ken Applegate, VP Transportation Services
    Valero Marketing and Supply
  • Data from Google: http://www.google.com/finance?q=NYSE:BP&fstype=ii
  • FRS = Financial Report System – DOE EIA
    Major Companies Surveyed
    Alenco Inc.
    Exxon Mobil Corporation
    Amerada Hess Corporation
    Lyondell Chemical Corporation
    Anadarko Petroleum Corporation
    Marathon Oil Corporation
    Apache Corporation
    Motiva Enterprises, L.L.C.
    BP America, Inc.
    Occidental Petroleum Corporation
    Chesapeake Energy Corporation
    Shell Oil Company
    Chevron Corporation
    Sunoco, Inc.
    CITGO Petroleum Corporation
    Tesoro Petroleum Corporation
    ConocoPhillips Company
    The Williams Companies, Inc.
    Devon Energy Corporation
    Total Holdings USA, Inc.
    El Paso Corporation
    Valero Energy Corp
    EOG Resources, Inc
    XTO Energy, Inc.
    Equitable Resources, Inc.
  • FRS = Financial Report System – DOE EIA
    Major Companies Surveyed
    Alenco Inc.
    Exxon Mobil Corporation
    Amerada Hess Corporation
    Lyondell Chemical Corporation
    Anadarko Petroleum Corporation
    Marathon Oil Corporation
    Apache Corporation
    Motiva Enterprises, L.L.C.
    BP America, Inc.
    Occidental Petroleum Corporation
    Chesapeake Energy Corporation
    Shell Oil Company
    Chevron Corporation
    Sunoco, Inc.
    CITGO Petroleum Corporation
    Tesoro Petroleum Corporation
    ConocoPhillips Company
    The Williams Companies, Inc.
    Devon Energy Corporation
    Total Holdings USA, Inc.
    El Paso Corporation
    Valero Energy Corp
    EOG Resources, Inc
    XTO Energy, Inc.
    Equitable Resources, Inc.
  • Sources:
    Wikpedia: http://en.wikipedia.org/wiki/API_gravity
    American Petroleum Institute)
  • Source of China’s Subsidies: http://www.nytimes.com/2008/06/04/business/worldbusiness/04iht-rtrcol05.1.13452490.html?_r=1
    http://www.rigzone.com/news/article.asp?a_id=51744
  • Sources:
    (1)Testimony of Chairman Gary Gensler Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, December 2, 2009
    (2) Interim Report on Crude Oil: Interagency Task Force on Commodity Markets - http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf
  • FRS:
  • Sources:
    (1)Testimony of Chairman Gary Gensler Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, December 2, 2009
    (2) Interim Report on Crude Oil: Interagency Task Force on Commodity Markets - http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf
  • Source: Oil 101, by Morgan Downey
  • (1) Interim Report on Crude Oil: Interagency Task Force on Commodity Markets - http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf
  • CFTC.gov
  • Source: CFTC Interim Report
  • Source: CFTC Interim Report
  • Source:
    Petronet.com Datasets on Futures Contracts
    DOE EIA WTI Data with St. Louis Fed CPI Data
    And…
    http://www.marketwatch.com/story/goldman-sachs-raises-possibility-of-200-a-barrel-oil
    http://www.cnsnews.com/news/article/55377
    "As the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices," Goldman said.
  • Source:
    Petronet.com Datasets on Futures Contracts
    DOE EIA WTI Data with St. Louis Fed CPI Data
    And…
    http://www.marketwatch.com/story/goldman-sachs-raises-possibility-of-200-a-barrel-oil
    http://www.cnsnews.com/news/article/55377
    "As the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices," Goldman said.
  • (1) Fundamentals represents those who attribute the 2004 to 2008 rise in oil prices to fundamentals, with the two divisions, oil peak theorists and optimists.

    (2) Speculators represents the two groups arguing that speculation caused the 2004 to 2008 oil price increases to speculation, with governments and downstream industries representing different divisons.

    Source: My own Analysis!
  • Citation:
    (1) http://www.heatingoil.com/blog/9898104/
    (2) James D. Hamilton, Causes and Consequences of the Oil Shock of 2007-08*
  • Citation:
    (1) http://www.heatingoil.com/blog/9898104/
    (2) James D. Hamilton, Causes and Consequences of the Oil Shock of 2007-08*
  • Source:
    Testimony of Chairman Gary Gensler Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, December 2, 2009
    CFTC Chairman Gary Gensler Comments on House Passage of H.R. 4173, December 11, 2009
    Remarks of Chairman Gary Gensler, “OTC Derivatives Reform”, Council on Foreign Relations, January 6, 2010
    Farm Bill: http://www.usda.gov/wps/portal/farmbill2008?navid=FARMBILL2008
  • Source:
    Testimony of Chairman Gary Gensler Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, December 2, 2009
    CFTC Chairman Gary Gensler Comments on House Passage of H.R. 4173, December 11, 2009
    Remarks of Chairman Gary Gensler, “OTC Derivatives Reform”, Council on Foreign Relations, January 6, 2010
  • Source: Bloomberg
    http://www.bloomberg.com/apps/news?pid=20601130&sid=an4FGruBQwkU
    The CFTC Voted 4 to 1 (February 2nd) to put proposal out for 90
    day public comment period to cap traders for all-monthly limits at
    10% of the open interest of the first 2.5% open interest beyond 25,000.
    The single-month would limit 2/3 of the aggregate cap

    (2) Limits in spot month would hold investors to 25% of the open
    interest in the future for physical delivery. A trader with spot month
    cash-settled contracts could hold 5 times as many contracts as long as
    they held no physically settled contracts in the spot month
  • Source: Bloomberg
    http://www.bloomberg.com/apps/news?pid=20601130&sid=an4FGruBQwkU
    The CFTC Voted 4 to 1 (February 2nd) to put proposal out for 90
    day public comment period to cap traders for all-monthly limits at
    10% of the open interest of the first 2.5% open interest beyond 25,000.
    The single-month would limit 2/3 of the aggregate cap

    (2) Limits in spot month would hold investors to 25% of the open
    interest in the future for physical delivery. A trader with spot month
    cash-settled contracts could hold 5 times as many contracts as long as
    they held no physically settled contracts in the spot month
  • Source: Bloomberg
    http://www.bloomberg.com/apps/news?pid=20601130&sid=an4FGruBQwkU
    The CFTC Voted 4 to 1 (February 2nd) to put proposal out for 90
    day public comment period to cap traders for all-monthly limits at
    10% of the open interest of the first 2.5% open interest beyond 25,000.
    The single-month would limit 2/3 of the aggregate cap

    (2) Limits in spot month would hold investors to 25% of the open
    interest in the future for physical delivery. A trader with spot month
    cash-settled contracts could hold 5 times as many contracts as long as
    they held no physically settled contracts in the spot month
  • Source:
    (1) Bloomberg
    http://www.bloomberg.com/apps/news?pid=20601130&sid=an4FGruBQwkU
    (2) Testimony of Chairman Gary Gensler Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, December 2, 2009
  • Oil Physical and Financial Markets: Economics, Engineering, Pricing, And Regulations

    1. 1. Oil Physical & Financial Markets: Economics, Engineering, Pricing, and Regulations Created By Kevin P. Kane
    2. 2. Background Oil Futures Fundamentals Oil Physical Fundamentals Speculation Debate New CFTC Rules I III II IV V CONTENT Conclusion VI Derivatives VII
    3. 3. Background Oil PricesA I 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 Jan-80 Feb-81 Mar-82 Apr-83 May-84 Jun-85 Jul-86 Aug-87 Sep-88 Oct-89 Nov-90 Dec-91 Jan-93 Feb-94 Mar-95 Apr-96 May-97 Jun-98 Jul-99 Aug-00 Sep-01 Oct-02 Nov-03 Dec-04 Jan-06 Feb-07 Mar-08 Apr-09 May-10 Real Oil Price (2008)WTI
    4. 4. Background Oil PricesA I Op Po 1 2 3 4 S2D1 D2D3 (1998) $20 (2008) $100 (2009) $50 S1
    5. 5. 60% of all new oil discoveries are offshore Oil Supply Concerns 09-2008 drop in price largely reflected drop in demand Expected 2030 Demand Creates Uncertainties in Supply $70 per barrel to receive same profit as $30 per barrel several years ago Excess Capacity Almost Exceeded in 2008. New Production Growth Slow Inexpensive Recoverable Oil Gone. Capital Intensive Oil Remaining Crude Quality Decreasing (API & Sulfur) – Refinery Margin Decreasing Optimists and Pessimists Politicize Oil Price Debate 이연희 Oil Physical FundamentalsII BACKGROUND
    6. 6. Three Aspects Reviewed Firm Level Price Discovery: Firms, Fundamentals, & Distortions Economic Level Demand •World GDP •Inventory vs. Reserve •Short Term Inelasticity •Expected Demand Supply •Production •Excess Capacity •Proved vs. Probable •Offshore vs. Onshore •Inelasticity Interest and Ex Rates •∆R → ↑ or ↓Op •↓$→↑$ex →↑Cf→↑Odw •↓$ →↓O-Expp→↑Scut Distortion Level Supply Side •Concerted Production •Collusion Demand Side •Subsidies •Price Ceiling •MS Expansion Uncertainty – Politics •Supply Disruption •Nationalization •Transit Monopolies E&P Firm Costs •Exploration •Development •Production Upstream Factors •Geology •Drive Mechanism •Recovery Factor •Reserve Classification •R/q Ratio Downstream Factors •Refinery Capacity •Refinery Margin •API – Sulfur Content Oil Physical FundamentalsII
    7. 7. Proved Reserves (≥ 90) Probable Reserves (> 50%) Possible Reserves (< 50%) Reserves which on the available evidence are 90% certain to be technically and economically producible Reserves which are not yet proven but which are estimated to have greater than 50% chance of being technically & economically producible Reserves which at present cannot be regarded as probable but which are significant but less than 50% chance of being technically producible Oil Physical FundamentalsII Firm Level – Understanding Definitions
    8. 8. Q Q = Liquid Hydrocarbons Produced Time QEL = Economic Limit where if one goes below this line they do not sell enough to cover their operating costs Est. QEL Example of Remaining Oil Reserves if Produced to this point 30% to 90% of Oil in Place (OIP) is Left in the Ground Unrecovered Oil Reserves Are NOT SUPPLY – Expected Incremental Supply Oil Physical FundamentalsII Firm Level - Reservoir Economics R/q Critical Ratio (15-10) equally important as MC & S&D in Determining Production Levels
    9. 9. Oil Natural Gas Oil Expansion 2 to 5 Gas Expansion 70 to 95 Solution Gas 10 to 30 Gas Cap 20 to 50 Gravity Segregation 30 to 70 Water Drive 20 to 50 45 to 70 Pay Zone Water Gas Cap Surface Derrick Oil Physical FundamentalsII Saudi Arabia Conspiracies Debunked: Water Drive and Conning Firm Level - Natural Drive / Recovery Natural Drive Type Recovery Percentage
    10. 10. Recovery Estimation Methods Oil Physical FundamentalsII Recovery of Oil: Delicate Business Oil in Place Volumetric Method Material Balance Estimation is not an exact science and is subject to potential abrupt changes in expected recovery and production levels: changes in pressure, water entry, et al. Total hydrocarbon content in an oil reservoir, referred to as Stock Tank Original Oil In Place (STOOIP) = Bulk (rock) volume (acre-feet or cubic meters) = Fluid-filled porosity of the rock (fraction) = Water saturation - water-filled portion of this porosity (fraction) = Formation volume factor (dimensionless factor for the change in volume between reservoir and standard surface conditions) Decline Curve Analysis
    11. 11. Oil Physical FundamentalsII Primary Recovery – Sucking & Pulling Sucker Rod Pumps, Plunger Lift Pumps, Hydraulic Lift Pumping, Progressing Cavity Pumps, Gas Lift Pumps, Electric Submersible Pumps (ESPs) Water Flooding (Most Common), Gas Reinjection Create Fractures (Permeability) & Pumping Inert Gas (Displacing Oil) & Lowering Viscosity Hydraulic Fracturing, Acid Fracturing, Miscible Fracturing, Thermal Recovery, Chemical Flooding, In-Situ Combustion, Microbial EOR Secondary Recovery – Increase Reservoir Pressure Enhanced Oil Recovery (EOR)– Tertiary Production Firm Level - Natural Drive – Recovery Factor
    12. 12. Measure of the relative Density of Oil (Higher Figure = Better) Tell us how much Sulfur will need to be separated from the oil API Gravity (Specific Gravity Sulfur Content Two Factors Firm Level – Changing Oil Oil Physical FundamentalsII
    13. 13. Oil Physical FundamentalsII 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5 29.5 30 30.5 31 31.5 32 1/1/1995 8/1/1995 3/1/1996 10/1/1996 5/1/1997 12/1/1997 7/1/1998 2/1/1999 9/1/1999 4/1/2000 11/1/2000 6/1/2001 1/1/2002 8/1/2002 3/1/2003 10/1/2003 5/1/2004 12/1/2004 7/1/2005 2/1/2006 9/1/2006 4/1/2007 11/1/2007 6/1/2008 SulfurContent API-24to34=MediumCrude U.S. Weighted Avg Crude Import Quality API Sulfur Firm Level: Crude Quality & Yields
    14. 14. CRUDE TYPES CHARATERISTICS YIELDS US REFINERY MEDIUM SOUR CRUDE (Mars, Basrah, Arab Medium) HEAVY SOUR CRUDE (Maya, Ratawi, Venezuela) SWEET CRUDE (Bonnie Light) 34 + API <0.5% Sulfur Inexpensive to Refine and Sold at a High Price 24 - 34 API > 1.0 % Sulfur More expensive than “Sweet” to refine and sold for less < 24 API > 1.0 % Sulfur Least Ideal 8% Propane/Butane 49% Gasoline: Conventional, CARB, Premium 32% Distillate: Jet Fuel, Diesel, Heating 11% Heavy Fuel Oil & Other Oil Physical FundamentalsII Firm Level: Refinery Crude Yields
    15. 15. Oil Physical FundamentalsII 0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 30,000.00 35,000.00 40,000.00 2005 2006 2007 2008 Millions Long Term Investment-Financial Statements XOM Chevron Shell Total S.A. BP Economic Level: Investment Trends
    16. 16. Oil Physical FundamentalsI 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 OilPrice(2008) BillionsInvested FRS Worldwide Expenditure E-D-P Exploration Development Production 2008 WTI If we considerExpected Demand and Need for Future Supply, Price is too Low at $20 to $40 per barrel Declining either because of E&P ROI from 1990s, or increasing MC from offshore Economic Level: Investment Trends
    17. 17. Oil Physical FundamentalsI Economic Level: Investment Trends Op 1 2 3 4 S2D1 D2D3 (1998) $20 (2008) $100 (2009) $50 (1999)(2010)(2009) S1
    18. 18. -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 2/1/1982 11/1/1982 8/1/1983 5/1/1984 2/1/1985 11/1/1985 8/1/1986 5/1/1987 2/1/1988 11/1/1988 8/1/1989 5/1/1990 2/1/1991 11/1/1991 8/1/1992 5/1/1993 2/1/1994 11/1/1994 8/1/1995 5/1/1996 2/1/1997 11/1/1997 8/1/1998 5/1/1999 2/1/2000 11/1/2000 8/1/2001 5/1/2002 2/1/2003 11/1/2003 8/1/2004 5/1/2005 2/1/2006 11/1/2006 8/1/2007 5/1/2008 ProductionPercentageChange Production Changes Compared: Canada to OPEC Prod_Canada Prod_Opec Oil Physical FundamentalsII Cutting Production when price falls is natural economic behavior due to marginal costs—something not specific to only OPEC Economic Level: Production & Marginal Costs
    19. 19. 이연희 0 1 2 3 4 5 Mb/d OPEC Spare Capacity Algeria Angola Ecuador Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Oil Physical FundamentalsII Critical & Unique Period for Low Spare Capacity due to Expected Demand Economic Level: Spare (Excess) Capacity
    20. 20. 2200.0 2400.0 2600.0 2800.0 3000.0 3200.0 3400.0 3600.0 3800.0 4000.0 4200.0 0.00 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 60,000.00 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 (WorldOilProductionTonnes (Millions) WorldGDP(2008)Billions World GDP = Oil Production World GDP Billions World Production Tonnes Oil Physical FundamentalsII Economic Level: Supply & Demand
    21. 21. 165000000 215000000 265000000 315000000 365000000 0.0 200000000.0 400000000.0 600000000.0 800000000.0 1000000000.0 1200000000.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 TonnesofOilChina TonnesofOilConsumed Oil Consumption NA Total Europe & Eurasia China China’s anti-free market subsidy policies may have caused the 2004 to 2008 Price Spike. Without Subsidies, China’s consumption and GDP would have slowed, reducing demand, and moving equilibrium down more smoothly. More Inelastic Why? China’s Fuel Subsidies are 1% of GDP, “Morgan Stanley” Oil Physical FundamentalsII Economic Level: Inelastic Demand
    22. 22. Oil Physical FundamentalsI 0 2 4 6 8 10 12 14 16 0 20 40 60 80 100 120 140 1/1/1982 2/1/1983 3/1/1984 4/1/1985 5/1/1986 6/1/1987 7/1/1988 8/1/1989 9/1/1990 10/1/1991 11/1/1992 12/1/1993 1/1/1995 2/1/1996 3/1/1997 4/1/1998 5/1/1999 6/1/2000 7/1/2001 8/1/2002 9/1/2003 10/1/2004 11/1/2005 12/1/2006 1/1/2008 FederalFundsRate RealOilPriceWTI(2008) Federal Funds Rate & Oil Price Real Oil Price WTI (2008) Federal Funds Rate Economic Level: Oil Priced in Dollars
    23. 23. DERIVATIVESIII Derivatives: Futures & OTC Hedge Risk Contracts For Future Price: Futures, Credit Default Swaps, Interest Rates, Exchange Rates, OTC, et al. Derivatives Traded Between 2 Parties Outside of “Transparent, Organized Market Structures” such as NYMEX—a central exchange or trading venue. Over-The-Counter (OTC) Derivatives Calls, Puts, Premium: $300 Trillion Dollar Market Commodity Swap Dealers offer tailored swap contracts to client OTC Markets. Limiting unmatchable contract exposure requires futures markets Clearing Houses Clear the agreement to accept a future delivery of oil through a futures contract Often settled in cash rather than physical delivery. 03–08 only 2% physical delivery Hedging Risk
    24. 24. Oil Futures FundamentalsIV Oil Futures Price Discovery Short & Long Term Trader Classifications Position Limit CFTC
    25. 25. Price Discovery Information Sharing and Equilibrium – one world oil price One countries oil supply gain, is everyone’s gain Oil Futures FundamentalsIV Futures Market – NYMEX (DCM), ICE (ECM) A Contract to Receive Delivery of a Commodity at a Future Date: Paper Oil – less than 1% Physical A Forward Curve Contango versus Backwardation Intermonth Spread (Switch) – Full Carry + Forward Curve (In Contango) Primary Functions Economics of Futures Oil Futures Market “In first 10 months of 2009, more than 114 million (114 billion barrels at $1.6 Trillion dollars) WTI contracts were traded on CFTC-regulated exchanges.” Gary Geisler
    26. 26. Oil Futures FundamentalsIII $78.00 $79.00 $80.00 $81.00 $82.00 $83.00 $84.00 $85.00 $86.00 $87.00 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 OilFuturesin$ WTI Crude Futures - Contango WTI Crude Futures -… Back of the Curve Front of the Curve Forward Curve - Term Structure Intermonth Spread Months ForwardToday - Cash Oil Futures Market
    27. 27. Speculator 1: Scalpers or Market Makers Operate Shortest Horizon, sometimes trading within seconds. Do not trade with a view of where prices are going. CFTC Interim Report Oil Futures FundamentalsIV Speculator 2: View of Long Term Anticipate prices in minutes, hours, days, weeks, or months = make price discovery Hedgers Commercial Interests. If one holds physical inventory but does not hedge by going short, will with hold downward pressure on prices Commercial Traders Non-Commercial Traders Oil Futures Market
    28. 28. COT Report CFTC Publishes every Friday at 3:30 PM Eastern Time. 90% of all Open Interests! Contains a summary of traders’ positions as of the close of business on previous Tuesday for each market in which 20 or more traders hold positions equal to or above the large trader reporting levels established by the CFTC Oil Futures FundamentalsIII CFTC: Commodity Futures TRADING Commission Regulating Certain Markets for Risk Management Contracts (Derivatives) REGULATORS Oil Futures Market
    29. 29. Speculation DebateV WTI Average Open Interest by Non-Commerical Participants, 2003-2008 Investment Banks & Speculation
    30. 30. Speculation DebateV WTI Average Open Interest by Commercial Participants, 2003-2008 Investment Banks & Speculation
    31. 31. Speculation DebateV 0 20 40 60 80 100 120 140 160 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2005.03.15 2005.04.26 2005.06.07 2005.07.19 2005.08.30 2005.10.11 2005.11.22 2006.01.03 2006.02.14 2006.03.28 2006.05.09 2006.06.20 2006.08.01 2006.09.12 2006.10.24 2006.12.05 2007.01.16 2007.02.27 2007.04.10 2007.05.22 2007.07.03 2007.08.14 2007.09.25 2007.11.06 2007.12.18 2008.01.29 2008.03.11 2008.04.22 2008.06.03 2008.07.15 2008.08.26 2008.10.07 2008.11.18 2008.12.30 2009.02.10 2009.03.24 2009.05.08 2009.06.16 2009.07.28 2009.09.08 2009.10.20 2009.12.01 WTIOil CFTCData:NetBuyingW/Options Total Positions With Options: Bias Result WTI 선물 Net Buying Positions-O Long Positions alone appear to move up before prices, but to be non-bias, we must include short positions as well. A non-bias result with both short and long positions is in the next slide. Short positions cancel out Long Long Positions & Oil Prices
    32. 32. Speculation DebateV 0 20 40 60 80 100 120 140 160 0 50,000 100,000 150,000 200,000 250,000 2005.03.15 2005.05.17 2005.07.19 2005.09.20 2005.11.22 2006.01.24 2006.03.28 2006.05.30 2006.08.01 2006.10.03 2006.12.05 2007.02.06 2007.04.10 2007.06.12 2007.08.14 2007.10.16 2007.12.18 2008.02.19 2008.04.22 2008.06.24 2008.08.26 2008.10.28 2008.12.30 2009.03.03 2009.05.08 2009.07.07 2009.09.08 2009.11.09 WTIOil CFTCData:NetBuyingW/Options Net Buying With Options: Non-Bias Result WTI 선물 Net Buying Positions-O Long and Short Positions & Oil Prices
    33. 33. Speculation DebateV Oil Price Schools of Thought & Primary Players Oil Prices 04-08 Increase Arguments Demand & Supply Reserves/ Discovery Declining Marginal Costs Optimists Oil Peakers Downstream Lobbyists Governments SpeculatorsFundamentals Distortions Excess Capacity US Fed Rate - $ Value Speculation Oil Peak 0 KEY Accept Partially Accept Reject US, JP, KR EU Oil Prices, Bias, and Political Lenses
    34. 34. SPECULATION DEBATEV INTERESTS Where is the Absolute Answer to Oil Prices? (1) Want to cover MC and generate capital for investment. (2) Want to avert demand destruction (1) Long Term View of Oil & Energy (2) Change Consumer Behavior (3) Sustain Globalization 0 (1) Realize Low Prices (2) Sustain Popularity (3) Show people they are doing something (1) Hedge Risk (2) Price Discovery (3) Speculators: Price Changes Dishonest Governments Honest Governments Oil Producers Oil Traders Truth?
    35. 35. Jeffrey Harris, Chief Economist at the CFTC, quit his post in January after finding no evidence that speculation played a role in driving up oil prices. SPECULATION DEBATEV SPECULATION EVIDENCE CFTC Chief Economist Speculation Evidence Commodity Trading Regulation Low Price Elasticity coupled with Insufficient Production Increases caused the 2007 to 2008 price increases rather than speculation James Hamilton, Economist Speculation Evidence “We do not need to show excessive speculation is affecting prices in order to approve the rule.”(Position Limits, et al.) CFTC Officials Speculation Evidence
    36. 36. If a contact traded in an Exempt Commercial Market (ECM) is found to influence price discovery, the ECM is subject to heightened regulation and to comply with Futures Contract principles New CFTC RulesVI ENACTED REGULATIONS Strengthen CFTC Authority over Futures Market (H.R. 6124) Farm Bill, 2008 Enacted Commodity Trading Regulation
    37. 37. (1) Wall Street Wide Spreads from Lack of Buyer-Seller transparency (2) Concentrated with 6 to 15 Institutions worldwide (3) want to control for potential risks from interconnectedness. (4) Transparency To Public & Regulatory Body = Better Pricing New CFTC RulesVI PROPOSED REGULATIONS Move To Standard OTC transactions into clearing houses Over-The-Counter (OTC) Derivatives Supporting Argument Option premium costs change with changes in underlying futures prices rather than options being a part of price discovery themselves. So option prices are derived from futures prices rather than setting futures prices - hence options are called derivatives.” Morgan Downey, Commodity Trader Opposing Argument Fear vs. Empiricism
    38. 38. (1) The CFTC Voted 4 to 1 (01-14-10) to put proposal out for 90 day public comment period to cap traders for all-monthly limits at 10% of the open interest of the first 2.5% open interest beyond 25,000. The single-month would limit 2/3 of the aggregate cap cap traders for all-monthly limits. (2) Caps Will covering individual exchanges, spot-month contracts, all-month contracts, and would include a cumulative gap across U.S. exchanges. (3) Limits on Who is Exempt (Airliners Exempt) from position limits New CFTC RulesVI PROPOSED REGULATIONS POSITION LIMITS Proposed A Punishment Without a Crime •Individual exchanges: ICE and CME separately •Spot month: the month nearest to expiry •All Contract months: all months listed into the future on the futures exchange •Cumulative gap across U.S. exchanges: CME and ICE together •Position Limit: A limit is X futures contracts * 1000 barrels Terms Explained
    39. 39. (1) Removes Concentration in Futures Market away from a Few Major Participants, Including Goldman Sachs. (2) Curtails Momentum on Long Positions New CFTC RulesVI PROPOSED REGULATIONS POSITION LIMITS Supporting Argument No evidence concentration of a few players in the futures markets influences momentum of price discovery into one direction, and against market principles to suggest that it is inappropriate for a someone to exercise their right to make money from price changes. People should not have a natural entitlement to be free from competition with successful banks. It is not the role of government to prevent losers in the free market. Opposing Argument Flawed Premise
    40. 40. (1) Under the aforementioned February Proposal, Swap Dealers will No Longer Receive Confidential Hedge Exemptions. This proposal targets 10 large traders across oil, natural gas, heating oil, and gasoline markets, some of whom could qualify for exemptions. (2) Swap Dealers would instead would need “risk management” exemptions, that would be reviewed monthly by the commission and made public after six months New CFTC RulesVI PROPOSED REGULATIONS HEDGE DISCLOSURE EXEMPTIONS Proposed Market Intervention
    41. 41. (1) Increases Transparency & Reduces Market Information Deficit for Price Discovery (2) Increases Public Access to see Scope and Scale of Markets (3) Eliminates Information Deficit for regulators, allowing them to gather information necessary to police markets New CFTC RulesVI PROPOSED REGULATIONS TRANSPARENCY Supporting Argument (1) Since it may not be possible for the OTC market to influence price discovery, and since their prices are determined by the Futures Market, the effort will not achieve its insinuated aims. It is misleading to the public. (2) The public has no inalienable right to obtain market information acquired by banks since they invested capital to obtain that information. The belief that people are entitled to information is flawed. Opposing Argument Immoral Entitlement
    42. 42. CONCLUSIONVII Who is behind high oil prices? (1) OPEC, Wall Street, Corrupt Banks? No! (2) Oil Supply & Demand Fundamentals? Yes! (3) Energy Price Ceilings & Control? Yes! (4) The Average Consumer? Yes! (5) Government Social Policies Promoting Demand? Yes! Cure the Disease, not the Symptom!
    43. 43. CONCLUSIONVII Oil Prices & Globalization Banks, OPEC, Oil Companies, are not the source of oil price instability! Prioritize Long Term Over Short Term Educate Populations! Don’t prey on them for Votes! Recognize that in a Financially and Economically Integrated World, Energy Independence is Impossible! Denationalize our View of Energy Security & Oil Oil is Not a Public or National Good If the intention of regulation speculators is to appease angry voters or to suppress oil price, it is wrong, and could lead to a price spike at a later date!
    44. 44. CONCLUSIONVII Drafted and Presented by Kevin P. Kane QUESTIONS?

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